Links: Missiles, ISAs, Gold, Gilts and Africa
Further reading for the weekend: The lessons to learn from the Iran/Israel missile saga, why Africa is full of opportunity, might Labour come after your ISA and the missing gold buyers.
Factoids
1. The remorseless rise of ETFs in Europe rolls on: According to Morningstar, “the European exchange-traded fund and exchange-traded commodity market gathered EUR 44.5 billion of flows in the first quarter of 2024, down from EUR 47.4 billion in the last quarter of 2023. Assets under management grew to EUR 1.81 trillion from EUR 1.64 trillion at the end of 2023. This was a 10% increase in the quarter - a new record-high for the market. The bulk of flows in the first quarter went to equity ETFs, totalling EUR 36.8 billion. Investors mostly favoured U.S. equity exposure, both individually and through global developed index propositions. Value equity strategies and German equity were out of favour”. Source Morningstar.
2. How much is Bytedance worth? LOTS!!!: Analysts at Jefferies note” numerous press reports last week of Bytedance's blockbuster results, reporting EBITDA of $40bn for 2023, up 60% from the $25bn of EBITDA reported for 2022. Based on Bytedance's $268bn valuation implied by the recent share buyback and ignoring the company's likely net cash position, this represents an EV/EBITDA multiple of 6.7x. This relatively modest valuation multiple may, in part, reflect the potential for a U.S. TikTok sale or ban that would understandably impact earnings, albeit noting the vast majority of revenues are generated from Bytedance's Chinese operations. Despite this, the low multiple could also suggest further medium-term upside to its carrying valuation, with The Schiehallion Fund (MNTN), Scottish Mortgage (SMT), and HarbourVest Global Private Equity (HVPE) holding stakes equivalent to 5.2%, 2.4% and 0.3% of NAV respectively, and cognisant the Baillie Gifford funds already held Bytedance at a discount to the $268bn as of November. In reality, it may take an IPO to realise this upside, the timing of which will remain uncertain while the company is still subject to U.S. political scrutiny.
3. The rules of attraction: Another psychology gem from Rob Henderson. The rated strength of a male body accounts for 70% of the differences in women’s attractiveness ratings of male bodies. None of the women produced a preference for weaker men. In both samples, the strongest men were the most attractive, the weakest men were the least attractive. (source).
4. Stocks are bad! (Cool that is – keep up).: According to Moneyin2, the new trend for US teens is investing in stocks. They favour Tesla, Apple, Amazon and other tech stocks, the WSJ says. 25% of 13- to 17-year-olds have money in the market. Source Moneyin2
5. +90: The per cent drop of oil spills from tankers since the 1970s. The quantity of oil spilt has also fallen, from over 300,000 tonnes in the 70s to an average of 10,000 tonnes per year in the past decade.
Stock Note: Buy list - Hipgnosis
According to Jefferies, the board has announced a recommended cash offer, where Concord (backed by Apollo) will acquire each SONG share for $1.16 (or £0.932) in cash, equivalent to $1,402.7m. In addition, if Concord can agree to the termination of the investment advisory agreement, shareholders will be entitled to an additional consideration of up to $25m less any amount payable to the investment adviser (the 'contingent consideration'). Concord has received irrevocable undertakings to vote in favour of the deal by shareholders representing c.23.56% of SONG's shares in aggregate, alongside the 0.03% from the board of directors, plus a letter of intent to vote in favour from shareholders representing 5.79% of SONG's shares, bringing the combined total to 29.38%. Publication of the scheme documents is expected on or before 16 May, with the court meeting and general meeting to take place on or around 16 June. The deal would need to be approved by 75% of the voting rights to pass, and if approved, the acquisition is expected to be completed in Q3
New funds note: Ark Invest launches in the UK
Following ARK Invest’s acquisition of Rize ETF in 2023, ARK Invest Europe has launched the first European UCITS ETFs. “This landmark launch includes the firm’s renowned 14 billion dollar flagship strategy—the ARK Innovation UCITS ETF—alongside the ARK Genomic Revolution UCITS ETF and introduces a purpose-built strategy tailored specifically for the European market: the ARK Artificial Intelligence & Robotics UCITS ETF: the new funds are
v ARK Innovation UCITS ETF (ARKK)
v ARK Genomic Revolution UCITS ETF (ARKG)
v ARK Artificial Intelligence & Robotics UCITS ETF (ARKI)
Each ETF carries an OCF of 0.75%.
It pays to have nukes
The St Andrews international relations specialist Phillips O’Brien has a cracking note out following the Iranian attacks on Israel. His key point is that it pays to have friends who are afraid of powers with nuclear weapons. Ukraine has suffered: they should never have given up those nukes in the 1990s.
“First. The intercept rates of Iranian systems were very high—but actually not unexpected under the conditions. It seems that 99% of the Iranian UAVs (300 or so fired) and Cruise missiles (30+ fired) were intercepted—for almost total protection from these systems. Even the ballistic missiles seem to have been intercepted at a rate well over 90%. 110+ were launched and about 7 may have hit their targets (or at least hit something in Israel).
Why is this—well because in this case Israel (with strong US aid) could start the intercept process, including with fixed wing aircraft, hundreds of miles before the Iranian systems reached Israel. They were able to proactively go and get the attacking systems with F-35s for instance (each of which might have the capability to shoot down 16 Shaheds). This meant that only a small percentage of the attacking systems, mostly the ballistic missiles, would have gotten anywhere close to the Israeli border.
Ukraine, in comparison, has to sit back and can only defend itself from much closer range and without all the options that Israel and the US have. Its a completely different and much more disadvantageous war that Ukraine has to fight (and the US wants it to be even more disadvantageous as it gets all bent out of shape if the Ukrainians even consider attacks over Russian soil). It also shows that great intellectual poverty of the US trying to delay the delivery of F-16s for so long. They could at least play a role strengthening Ukrainian defensive capabilities—even though they are far less sophisticated than what the Israelis and US used last night.
Second. The Iranian attack against a power that can actually defend itself efficiently should help put into perspective Russian power. Lately we have been hearing again about how powerful and adaptive Russia is—in a way that still over-rates what we are seeing. The issue determining the outcome of the Russian raids on Ukraine is more Ukrainian limitations than anything else. Ukraine has old and insufficient systems and is running out of ammunition. And Russia can launch attacks against Ukraine with almost no fear of disruption. It reinforces the message that Russia can be defeated if Ukraine is armed properly.
Third. One of the biggest differences last night is that Israel, which has far more capable air defenses than Ukraine, was supported by the USA, UK, and France in its efforts to shoot down Iranian systems. This is extraordinary and worthy of note. Why are they doing this? The US has been far more critical of Israel than Ukraine. The Ukrainians need the help more than Israel—and yet the US helps Israel more than Ukraine.
The answer seems to be that the US is desperate to in its minds limit the chance of Israeli escalation and is not really that bothered about Ukraine having the ability to escalate. Well, the big difference in escalation concerns is that Israel is a nuclear power and Ukraine is not.
Conclusion
So what the US is seeming to say is that if you are a nuclear power—we will help you to try and make sure you are safe. However, if you are not a nuclear power—tough luck and go deal with it. Its the flip side of the coin about how the US is dealing with Russia. In this case—if our friends (Ukraine) want to fight a nuclear power, the US will restrain them as much as possible by limiting what they get and what they can do.”
Iranians will, I am sure, be taking notes, as will other nations, including some in Asia.
More HERE
More Missiles and Taiwan
Another excellent analysis from military expert Stephen Bryen on what lessons the Israel/Iran missile saga has for another country, Taiwan.
“The first is that if China launched a similar attack on Taiwan, Taiwan would need outside support for its defense just as Israel needed outside support to fend off the Iranian attacks. As brilliant as Israel's air defense system is, it would have been saturated and unable to cope without help from the US, UK, Jordan and Saudi Arabia.
Taiwan's air defenses are, as far as we know, not integrated and layered like Israel's. Taiwan's air defenses consist of Patriot batteries and home-grown air defense solutions, especially Sky Bow III. Sky Bow is said to be capable of dealing with aircraft, cruise missiles and short range tactical missiles. It fills in the gap of coverage with Patriot Pac-3 designed to deal with strategic threats.
Taiwan has some sea based air defenses. Its six Lafayette-class frigates, the best warships in Taiwan's Navy, are equipped with RIM-72C Sea Chaparral air defense missiles. The missiles are old AIM-9 Sidewinders with very short range ( said to be 3 to 4 kilometers) and would not be effective against most contemporary threats. Taiwan has a project underway to upgrade the Lafayettes under the Xunlien Project. This project aims to install MK-41 vertical launch systems on the ships which requires significant structural changes to the frigates. The MK-41 is the same vertical launch system used on US AEGIS-equipped cruisers and destroyers, and also is used in the AEGIS Ashore system in Poland and Romania. Taiwan plans to equip the frigates with Sky Bow II or Sky Bow III missiles.
The second key finding is that Taiwan's domestic air defenses still need upgrading, especially since its current systems would have difficulty dealing with drones and with complex saturation attacks. In particular, Taiwan would greatly benefit from Iron Dome and with air defense integration know-how. Taiwan lacks any modern combat experience in using its missile defenses and has no hands-on knowledge of how they would perform under heavy combat stress.
One immediate enhancement would be for Taiwan to get Iron Dome. The US owns two Iron Dome systems which the US Army, a particularly retarded organization when it comes to common sense and air defenses, does not want or even know what to do with. The easy and obvious answer would be to transfer them to Taiwan.
The third finding relates to time and distance and how to handle an air attack on Taiwan. It is quite true that the Israeli and CENTCOM air defenses were cobbled together and probably could stand significant improvement, more automation, and other steps to exploit capabilities and commonalities. Even so, compared to what exists in the US Pacific Command (PACOM) and its responsibilities vis a vis Japan and Taiwan, it is hardly developed at all. PACOM cannot fight to defend Taiwan unless its systems are coordinated with Taiwan. Much of this means there is a great need for a fully mature command and control system. Taiwan has long been excluded from any coordination activities, has not been involved in regional military exercises led by PACOM, and so far as is known there is no planning on how to deal with a sophisticated attack on Taiwan from China. “
More HERE
How safe is your ISA?
The UK think tank Resolution Foundation, which is very close to Labour leaders, has published research attacking the trusty old ISA structure. It has three arguments against the flagship long-term savings policy.
Firstly, the policy is getting increasingly expensive: in 2023-24, ISAs cost £6.7 billion in foregone tax revenue compared to just £3.5 billion in 2018-19.
Secondly, ISAs overwhelmingly benefit the already better-off: in the lowest income bands, around two-thirds of ISA holders have less than £5,000 in savings. The same applies to just 18% of ISA holders earning £150,000 or more. Indeed, 48% of those on the highest incomes hold over £50,000 in their ISAs.
Thirdly, ISAs have done almost nothing to household savings rates, indicating that they are not generating new saving behaviour but simply shifting the timing and form of savings.
You can read more HERE. Based on my reading, I think a future Labour government will unlikely do much about ISAs. Extensive tinkering would be a surefire vote loser and the wrong thing to do. But I do think they might put a future cap on the total value of an ISA.
A helpful primer on Gilts
This is from Hal Cook, senior investment analyst at Hargreaves Lansdown. He notes that there have been three times more net buys in the first quarter of 2024 than there was in the first quarter of 2023. That is because sentiment has been strong:“Interest rates are likely to be at their peak for this cycle”, although it is also worth noting that investors who purchase gilts directly rather than through a fund do not have to pay capital gains tax
“Interest rates are likely to be at their peak for this cycle, with the broad expectation being that rates will come down from here. This is good for bonds, because falling yields means increasing prices. Current market pricing is suggesting that interest rates in the UK will be around 3.25-3.5% in five years’ time. This figure is around 3.6% for US interest rates and 2-2.25% for Europe. If this turns out to be correct, that will mean interest rate cuts from three of the most influential central banks globally in the coming months and years. When inflation falls and the central banks cut rates bonds appeal more to investors. This increases demand, and pushes the price up – so investors who are holding bonds will see the value of their holding increase. In the event of a market shock, it is possible that bonds will increase in value more again. This is particularly true for government bonds such as gilts, that could benefit from a safe haven trade in a market shock environment. The potential for bonds to increase in value in this scenario increases their diversification benefit within an investment portfolio. The yield of a bond is expressed as a percentage of the cost of it, so as prices rise, the yield automatically falls. However, while yields available on gilts today are lower than they were in the third quarter of 2023 (meaning that gilts more expensive to buy than they were), they are still offering good value compared to the last 15 years or so. Prior to the Truss-Kwarteng mini-Budget crisis in September 2022, the last time the 10-year gilt yield was above 4% was before the financial crisis in 2008. Investment in gilts has grown among HL clients over the last year or so. In 2023, we saw more than five times the number of HL clients trading gilts compared to in 2022, and net buys by volume and net buys by value were up six and sevenfold respectively. Momentum has carried into 2024, with three times more net buys in the first quarter of 2024 than there was in the first quarter of 2023. Where we experienced the first maturity of a gilt that was widely owned by our clients last year, we saw a significant proportion of clients reinvesting back into other gilts, showing how people's confidence in investing in the UK gilt market has continued.
“Investors who purchase gilts directly, rather than through a fund, do not have to pay capital gains tax on any increases in their capital value between purchase and sale or maturity. Confusingly, this is not the case for Gilt Strips though, where all returns are taxed as income.
For some investors, particularly those who pay higher rate tax, this has made bonds that have small coupons (interest payments) very appealing. They’re appealing because the coupons are taxed as income, but the rest of the return counts as a capital gain. As capital gains from gilts aren’t taxed, you get a better overall return after tax if the coupons are small.
It is important to understand that this doesn’t matter if you buy the gilt within a tax efficient wrapper such as an ISA or a SIPP. ISAs and SIPPs are products which mean that any income or capital gain from investments within them is not taxable.
When it comes to considering what to do with the proceeds from the maturity of a gilt, it is therefore important for investors to consider whether they have used all of their allowances within these wrappers rather than simply buying another a low coupon gilt. For example, it could be that an investor would be better off making use of their ISA allowance rather than buying a gilt in an ordinary fund and share account. Also, most new gilts have much higher coupons (interest payments) compared to those currently available. The higher the coupon, the smaller the tax benefit is likely to be from the lack of capital gains tax.”
Africa – the next big thing
In its latest report, debt ratings agency Moody’s reckons that working-age populations in most Sub-Saharan African (SSA) countries will increase over the next several decades, supporting higher economic growth rates. If paired with structural reforms that increase productivity, a growing workforce with a smaller dependent population can produce significantly higher real GDP growth rates, reducing poverty and inequality. However, insufficient job creation would aggravate already high social risks.
Working-age populations in most Sub-Saharan African (SSA) countries will increase over the
next several decades, supporting higher rates of economic growth. If paired with structural
reforms that increase productivity, a growing workforce with a smaller dependent population
can produce significantly higher real GDP growth rates, reducing poverty and inequality. But
insufficient job creation would aggravate already high social risks.
» Demographics have potential to boost GDP growth. A growing workforce can spur
higher rates of economic growth. However, the benefits to growth and livelihoods depend
on other factors that increase human capital and employment opportunities. Higher
economic growth, particularly if accompanied by a shift to higher-value-added output,
would increase government tax collection, creating a larger revenue base to service debt.
» Contribution to economic growth can be significant. We estimate the increase in
the working-age population will contribute about 0.3 percentage points to annual GDP
growth in 2025-40 for rated SSA sovereigns, holding other factors constant. For countries
such as Uganda (B2 negative), where the percentage of the population that is above
or below working age will decrease most, the boost to growth could be 0.7 percentage
points or higher. Other countries like Mali (Caa2 stable), Rwanda (B2 stable), Tanzania
(B1 stable) and Ethiopia (Caa3 stable) could also experience significant growth from
demographics. And increased productivity would boost economic growth further.
» Improvements to institutions and infrastructure facilitate productivity growth but
are difficult to achieve. Rwanda, Senegal (Ba3 stable), Côte d'Ivoire (Ba2 stable) and
Benin (B1 stable) are among SSA sovereigns that have strong institutions. However, most SSA sovereigns have weak institutions, which limits their ability to implement productivity-enhancing reforms that can amplify the demographics-driven boost to economic growth.
And while the sophistication of transport infrastructure can bolster sovereigns' export
competitiveness and trade gains, structural bottlenecks can constrain productivity growth.
» Growth in young, working-age population without adequate job creation could
worsen social risks.SSA sovereigns' credit profile will benefit from a growing labor
force only if workers are deployed into productive sectors. The high share of informal
employment and existing social and governance risks may limit real GDP growth in the
coming decades..
See the download link below for the report.
Last but by no means least – the missing gold buyers
We’ve been following the rise in the gold price for a while now in these letters.
What’s behind the surge? Our guess is investor concerns about monetary inflation, but commodities expert Ross Norman reckons he might have found a key driver in the rally: China
“The perhaps unsurprising answer to the mystery buyer … is China … just a lot more China than we might ever have imagined. On the face of it, yes retail demand is hot, and the central bank bought just 5 tonnes last month (that's roughly half one days gold mine production) – so great some headlines, but not really all that significant.
More impressively 124 tonnes was drawn down from the Shanghai Gold Exchange, which is seen as a proxy for domestic demand, taking Q1 offtake to 522 tonnes – very impressive and roughly double what we would expect to see. Meanwhile ETF gold demand remains small by any comparison. Great – but still no biscuit.
Our view that an options play is a contributory factor still stands, but again not sufficient to account for the price action we have seen. More HERE
Where the demand seems to be coming from - as the table below shows - is actually from the Shanghai Futures Exchange (SHFE) - often wrongly regarded as the smaller brother of the Shanghai Gold Exchange (SGE).
Daily gold turnover on the SHFE last year averaged $13.89 b/day (=billion dollars per day) – well behind London's LBMA average turnover at $78.91 b/day and New York's CME at $44.3 b/day.
And then things changed in March 2024, just when the gold price went through an inflection point. Business on SHFE essentially doubled in a month and then doubled again to nearly $40 b/day. That's headed for roughly half the size of the London market in 2 months.
All other exchanges includes gold contracts traded on: London Metal Exchange, Dubai Gold & Commodities Exchange, ICE Futures, US Metals, Borsa Istanbul, Bursa Malaysia, Moscow Exchange - RTSX, Tokyo Commodity Exchange.
Sources: Bloomberg, COMEX, Dubai Gold & Commodities Exchange, ICE Benchmark Administration, London Metal Exchange, Multi Commodity Exchange of India, Nasdaq, Shanghai Gold Exchange, Shanghai Futures, Exchange, Tokyo Commodities Exchange, World Gold Council.
This might explain why gold had not responded to news for example that the Fed would hold rates higher-for-longer as well as other bearish indicators. The buyers were likely looking at Chinese domestic issues.
So, two questions – what does this mean about the centre of gravity for global trading … and what does the SHFE futures buying mean for the outlook for the gold price ?
Too early to say whether the price discovery process is shifting to the East. Two exceptional trading months are insufficient to make any claim. But liquidity begets more liquidity and the momentum is certainly with China. Exchanges generate their own gravitational pull – its all a bit binary – and London has held the role for centuries as the leading hub, in much the same way that the London Metal Exchange (LME) has done for base metals.
Arguably the Chinese gold price is not adequately representative as a fair global benchmark because it is landlocked – gold cannot be readily exported and hence it could be argued that it only represents the domestic position. But as the world's largest producer and consumer, one would imagine that China has ambitions to be THE price-setter.
On the price direction … well in order to understand the gold market one would need to take a greater account of how things are seen through Chinese eyes – certainly just now.
As regards the price outlook itself … well that depends upon who is placing very large leveraged futures positions on SHFE (speculative or hedging ?) ; SHFE is not cash settled like CME and is for physical delivery which could create an interesting squeeze … generally though I would suggest the buying is of a lesser quality to say Chinese retail demand and central bank demand.
That is to suggest that the gold rally up to $2100 looks assured, but the $300 on top ... less so.
More HERE at Metals Daily.